---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005

OR

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from          to

Commission File Number 000-32469

|THE PRINCETON REVIEW, INC.                            
|------------------------------------------------------
|(Exact name of registrant as specified in its charter)

|                                                                  |                                     
|----------------------------------------------------------------- | ------------------------------------
|Delaware                                                          | 22-3727603                          
|(State or other jurisdiction of    incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                                  |                                     
|2315 Broadway   New York, New York                                | 10024                               
|(Address of principal executive offices)                          | (Zip Code)                          

Registrants telephone number, including area code: (212) 874-8282

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

|Yes
x | No
o
|----- | ----

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

|Yes
x | No
o
|----- | ----

The Company had 27,571,266 shares of $0.01 par value common stock outstanding at August 5, 2005.

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TABLE OF CONTENTS

|PART   I.  FINANCIAL INFORMATION |        
|-------------------------------- | -------
|                                 |        
|                                 | Item 1.
|                                 |        
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|                                 | Item 2.
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|                                 | Item 3.
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|                                 | Item 4.
|                                 |        
|PART   II.  OTHER INFORMATION    |        
|                                 |        
|                                 | Item 1.
|                                 |        
|                                 | Item 2.
|                                 |        
|                                 | Item 3.
|                                 |        
|                                 | Item 4.
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|                                 | Item 5.
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|                                 | Item 6.
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|SIGNATURES                       | 22     

2



PART I.  FINANCIAL INFORMATIONItem 1.  Consolidated Financial Statements (unaudited)

THE PRINCETON REVIEW, INC. AND SUBSIDIARIESCondensed Consolidated Balance Sheets (in thousands, except share data)

|                                                                                                                                                                       |  | June 30,   2005 |         | December 31,   2004 (1) |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ----------------------- | -
|                                                                                                                                                                       |  |                 |         |                         |  
|ASSETS                                                                                                                                                                 |  |                 |         |                         |  
|Current   assets:                                                                                                                                                      |  |                 |         |                         |  
|Cash   and cash equivalents                                                                                                                                            |  | $               | 11,462  |                         | $
|Accounts   receivable, net                                                                                                                                             |  |                 | 19,726  |                         |  
|Prepaid   expenses                                                                                                                                                     |  |                 | 1,842   |                         |  
|Inventory                                                                                                                                                              |  |                 | 1,204   |                         |  
|Other   assets                                                                                                                                                         |  |                 | 1,363   |                         |  
|                                                                                                                                                                       |  |                 |         |                         |  
|Total   current assets                                                                                                                                                 |  |                 | 35,597  |                         |  
|Furniture, fixtures,   equipment and software development, net                                                                                                         |  |                 | 14,876  |                         |  
|Investment in affiliates                                                                                                                                               |  |                 | 1,653   |                         |  
|Goodwill                                                                                                                                                               |  |                 | 31,511  |                         |  
|Other intangibles, net                                                                                                                                                 |  |                 | 9,760   |                         |  
|Other assets                                                                                                                                                           |  |                 | 4,790   |                         |  
|                                                                                                                                                                       |  |                 |         |                         |  
|Total   assets                                                                                                                                                         |  | $               | 98,187  |                         | $
|                                                                                                                                                                       |  |                 |         |                         |  
|LIABILITIES   AND STOCKHOLDERS EQUITY                                                                                                                                 |  |                 |         |                         |  
|Current   liabilities:                                                                                                                                                 |  |                 |         |                         |  
|Accounts   payable                                                                                                                                                     |  | $               | 4,568   |                         | $
|Accrued   expenses                                                                                                                                                     |  |                 | 7,882   |                         |  
|Current   maturities of long-term debt                                                                                                                                 |  |                 | 1,488   |                         |  
|Deferred   income                                                                                                                                                      |  |                 | 14,605  |                         |  
|                                                                                                                                                                       |  |                 |         |                         |  
|Total   current liabilities                                                                                                                                            |  |                 | 28,543  |                         |  
|Deferred rent                                                                                                                                                          |  |                 | 1,998   |                         |  
|Long-term debt                                                                                                                                                         |  |                 | 3,642   |                         |  
|Series B-1 Preferred Stock,   $.01 par value; 10,000 shares authorized issued and outstanding at June 30,   2005 and December 31, 2004 (liquidation value of  $10,000) |  |                 | 9,829   |                         |  
|Stockholders   equity                                                                                                                                                 |  |                 |         |                         |  
|Preferred   stock, $.01 par value; 4,990,000 shares authorized; none issued and   outstanding                                                                          |  |                 |        |                         |  
|Common   stock, $.01 par value; 100,000,000 shares authorized; 27,569,764 issued and   outstanding at June 30, 2005 and December 31, 2004                              |  |                 | 276     |                         |  
|Additional   paid-in capital                                                                                                                                           |  |                 | 116,267 |                         |  
|Accumulated   deficit                                                                                                                                                  |  |                 | (62,110 | )                       |  
|Accumulated   other comprehensive loss                                                                                                                                 |  |                 | (258    | )                       |  
|                                                                                                                                                                       |  |                 |         |                         |  
|Total   stockholders equity                                                                                                                                           |  |                 | 54,175  |                         |  
|                                                                                                                                                                       |  |                 |         |                         |  
|Total   liabilities and stockholders equity                                                                                                                           |  | $               | 98,187  |                         | $
|                                                                                                                                                                       |  |                 |         |                         |  

See accompanying notes.

|   
|---
|(1)

3



THE PRINCETON REVIEW, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Operations (unaudited) (in thousands, except per share data)

|                                                                            |  | Three Months Ended June 30, |        | Six Months Ended June 30, |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | -
|                                                                            |  |                             |        |                           |  
|                                                                            |  | 2005                        |        | 2004                      |  
|                                                                            |  |                             |        |                           |  
|Revenue                                                                     |  |                             |        |                           |  
|Test   Preparation Services                                                 |  | $                           | 20,630 |                           | $
|K-12   Services                                                             |  |                             | 7,122  |                           |  
|Admissions   Services                                                       |  |                             | 2,045  |                           |  
|                                                                            |  |                             |        |                           |  
|Total   revenue                                                             |  |                             | 29,797 |                           |  
|                                                                            |  |                             |        |                           |  
|Cost of   revenue                                                           |  |                             |        |                           |  
|Test   Preparation Services                                                 |  |                             | 6,452  |                           |  
|K-12   Services                                                             |  |                             | 3,183  |                           |  
|Admissions   Services                                                       |  |                             | 1,080  |                           |  
|                                                                            |  |                             |        |                           |  
|Total   cost of revenue                                                     |  |                             | 10,715 |                           |  
|Gross profit                                                                |  |                             | 19,082 |                           |  
|                                                                            |  |                             |        |                           |  
|Operating   expenses                                                        |  |                             | 19,460 |                           |  
|                                                                            |  |                             |        |                           |  
|(Loss) income from   operations                                             |  |                             | (378   | )                         |  
|                                                                            |  |                             |        |                           |  
|Interest expense                                                            |  |                             | (82    | )                         |  
|Other income                                                                |  |                             | 84     |                           |  
|Equity in the loss of   affiliates                                          |  |                             | (94    | )                         |  
|                                                                            |  |                             |        |                           |  
|(Loss) income before   (provison) benefit for income taxes                  |  |                             | (470   | )                         |  
|(Provision) benefit for   income taxes                                      |  |                             |       |                           |  
|                                                                            |  |                             |        |                           |  
|Net (loss) income                                                           |  |                             | (470   | )                         |  
|Dividends and accretion on   Series B-1 Preferred Stock                     |  |                             | (198   | )                         |  
|                                                                            |  |                             |        |                           |  
|Net (loss) income   attributed to common stockholders                       |  | $                           | (668   | )                         | $
|                                                                            |  |                             |        |                           |  
|Basic and diluted (loss)   income per share                                 |  | $                           | (0.02  | )                         | $
|                                                                            |  |                             |        |                           |  
|Weighted average shares   used in computing basic (loss) income per share   |  |                             | 27,570 |                           |  
|                                                                            |  |                             |        |                           |  
|Weighted average shares   used in computing diluted (loss) income per share |  |                             | 27,570 |                           |  
|                                                                            |  |                             |        |                           |  

See accompanying notes.

4



THE PRINCETON REVIEW, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows (unaudited) (in thousands)

|                                                                                            |  | Six Months Ended June 30, |       
|------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                            |  |                           |       
|                                                                                            |  | 2005                      |       
|                                                                                            |  |                           |       
|Cash flows   from operating activities:                                                     |  |                           |       
|Net loss                                                                                    |  | $                         | (615  
|Adjustments to reconcile   net loss to net cash provided by (used in) operating activities: |  |                           |       
|Depreciation                                                                                |  |                           | 834   
|Amortization                                                                                |  |                           | 2,783 
|Write-off   of deferred financing costs                                                     |  |                           | 117   
|Bad   debt expense                                                                          |  |                           | 145   
|Deferred   rent                                                                             |  |                           | 610   
|Other,   net                                                                                |  |                           | 95    
|Net   change in operating assets and liabilities:                                           |  |                           |       
|Accounts   receivable                                                                       |  |                           | 3,569 
|Prepaid   expenses                                                                          |  |                           | 177   
|Other   assets                                                                              |  |                           | 40    
|Accounts   payable and accrued expenses                                                     |  |                           | (3,251
|Deferred   income                                                                           |  |                           | (3,031
|                                                                                            |  |                           |       
|Net cash provided by (used   in) operating activities                                       |  |                           | 1,473 
|                                                                                            |  |                           |       
|Cash flows   from investing activities:                                                     |  |                           |       
|Purchases of furniture,   fixtures, equipment and software development                      |  |                           | (3,946
|Additions to capitalized   development costs and other assets                               |  |                           | (2,266
|Investment in affiliate                                                                     |  |                           |      
|Loans and notes receivable                                                                  |  |                           | 250   
|                                                                                            |  |                           |       
|Net cash used in investing   activities                                                     |  |                           | (5,962
|                                                                                            |  |                           |       
|Cash flows   from financing activities:                                                     |  |                           |       
|Proceeds from the sale of   Series B-1 Preferred Stock, net of issuance costs               |  |                           |      
|Repayment of revolving   credit facility                                                    |  |                           | (2,000
|Proceeds from revolving   credit facility                                                   |  |                           |      
|Payment of deferred   financing costs                                                       |  |                           |      
|Capital lease payments                                                                      |  |                           | (346  
|Dividends on Series B-1   Preferred Stock                                                   |  |                           | (251  
|Notes payable related to   acquisitions                                                     |  |                           | (656  
|Proceeds from exercise of   options                                                         |  |                           | 7     
|                                                                                            |  |                           |       
|Net cash (used in) provided   by financing activities                                       |  |                           | (3,246
|                                                                                            |  |                           |       
|Net (decrease) increase in cash   and cash equivalents                                      |  |                           | (7,735
|Cash and cash equivalents,   beginning of period                                            |  |                           | 19,197
|                                                                                            |  |                           |       
|Cash and cash equivalents,   end of period                                                  |  | $                         | 11,462
|                                                                                            |  |                           |       

See accompanying notes.

5



THE PRINCETON REVIEW, INC. AND SUBSIDIARIESNotes to Condensed Consolidated Financial Statements (Unaudited)

1.  Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of The Princeton Review, Inc. and its wholly-owned subsidiaries, The Princeton Review Canada, Inc., and Princeton Review Operations LLC, as well as the Companys national advertising fund (together, the Company).  On January 1, 2005, the Company completed a corporate reorganization whereby the Company merged its former wholly owned subsidiaries, Princeton Review Products, LLC, Princeton Review Management, LLC, Princeton Review Publishing, LLC and Princeton Review Carolinas, LLC into the parent company, The Princeton Review, Inc.

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and reflect all adjustments, consisting only of normal recurring accruals, that are, in the opinion of management, necessary for a fair presentation of the interim financial statements. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2004 included in the Companys Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. The results of operations for the three-month and six-month periods ended June 30, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Products and Services

The following table summarizes the Companys revenue and cost of revenue for the three-month and six-month periods ended June 30, 2005 and 2004:

|                        |  | Three Months Ended June 30, |        | Six Months Ended June 30, |  
|----------------------- |  | --------------------------- | ------ | ------------------------- | -
|                        |  |                             |        |                           |  
|                        |  | 2005                        |        | 2004                      |  
|                        |  |                             |        |                           |  
|                        |  | (in thousands)              |       
|Revenue                 |  |                             |        |                           |  
|Services                |  | $                           | 24,948 |                           | $
|Products                |  |                             | 2,786  |                           |  
|Other                   |  |                             | 2,063  |                           |  
|                        |  |                             |        |                           |  
|Total   revenue         |  | $                           | 29,797 |                           | $
|                        |  |                             |        |                           |  
|Cost of   Revenue       |  |                             |        |                           |  
|Services                |  | $                           | 10,128 |                           | $
|Products                |  |                             | 438    |                           |  
|Other                   |  |                             | 149    |                           |  
|                        |  |                             |        |                           |  
|Total   cost of revenue |  | $                           | 10,715 |                           | $
|                        |  |                             |        |                           |  

6



Services revenue includes course fees, professional development, subscription fees and marketing services fees. Products revenue includes sales of workbooks, test booklets and printed tests, sales of course material to independently-owned franchisees and fees from a publisher for manuscripts delivered.  Other revenue includes royalties from independently-owned franchisees and royalties and marketing fees received from publishers.

Stock-Based Compensation

The Company accounts for the issuance of stock options using the intrinsic value method in accordance with Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees,and related interpretations. Generally for the Companys stock option plans, no compensation cost is recognized in the Consolidated Statements of Operations because the exercise price of the Companys stock options equals the market price of the underlying common stock on the date of grant.

Had the Company accounted for its employee stock options under the fair-value method of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, the Companys net loss per share would have been as follows:

|                                                                                                                                        |  | Three Months Ended June 30,           |        | Six Months Ended June 30, |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ------------------------- | -
|                                                                                                                                        |  |                                       |        |                           |  
|                                                                                                                                        |  | 2005                                  |        | 2004                      |  
|                                                                                                                                        |  |                                       |        |                           |  
|                                                                                                                                        |  | (in thousands, except per share data) |       
|Net (loss) income attributed   to common stockholders, as reported                                                                      |  | $                                     | (668   | )                         | $
|Total stock-based employee   compensation expense determined under fair-value based method for all awards,   net of related tax effects |  |                                       | (445   | )                         |  
|                                                                                                                                        |  |                                       |        |                           |  
|Pro forma net (loss) income   attributed to common stockholders                                                                         |  | $                                     | (1,113 | )                         | $
|                                                                                                                                        |  |                                       |        |                           |  
|Basic and diluted net   (loss) income per share, as reported                                                                            |  | $                                     | (0.02  | )                         | $
|                                                                                                                                        |  |                                       |        |                           |  
|Basic and diluted net   (loss) income per share, proforma                                                                               |  | $                                     | (0.04  | )                         | $
|                                                                                                                                        |  |                                       |        |                           |  

During the six months ended June 30, 2005, there were no stock options exercised.

Adoption of New Accounting Pronouncements

In December 2004, the FASB replaced SFAS No. 123 with SFAS No. 123(R), Share-Based Payments, which requires all share-based payments to employees, including employee stock options, to be recognized in the income statement based on their fair values.  In April of 2005, the SEC extended the effective date of the adoption until January 1, 2006, for calendar year companies.  Based on the options outstanding as of June 30, 2005 and the SFAS No. 123 pro forma information presented above, the Company expects SFAS No. 123(R) to have a material impact on its Consolidated Statement of Operations. However, the Company has not yet completed its evaluation as to the full impact.

7



Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (GAAP) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant accounting estimates used include estimates for uncollectible accounts receivable, deferred tax valuation allowances, impairment write-downs, amortization lives assigned to intangible assets and money back guarantees.

The Company began offering a money back guarantee to students who enrolled in classes for certain graduate test prep courses on or after February 22, 2005. In order to qualify to receive a full refund, students who do not achieve score improvements must have attended all class sessions, taken all practice tests and turned in all homework assignments.  This guarantee expires 90 days after completion of the course.  The Company reserves for expected refunds as revenue is recognized.

Actual results could differ from those estimated.

Reclassification

Certain balances have been reclassified to conform to the current quarters presentation.

2.  Accounts Receivable, Net

Accounts receivable, net consists of the following components:

|                                        |  | June 30,   2005 |        | December 31,   2004 |  
|--------------------------------------- |  | --------------- | ------ | ------------------- | -
|                                        |  |                 |        |                     |  
|                                        |  | (in thousands)  |       
|Accounts receivable -   customers       |  | $               | 19,124 |                     | $
|Accounts receivable -   related parties |  |                 | 1,823  |                     |  
|Allowance for doubtful   accounts       |  |                 | (1,221 | )                   |  
|                                        |  |                 |        |                     |  
|Accounts receivable, net                |  | $               | 19,726 |                     | $
|                                        |  |                 |        |                     |  

3.  Line of Credit

In February 2005, the Company repaid the entire outstanding balance and terminated the three-year revolving credit facility the Company had entered into in May of 2004 with Commerce Bank, N.A.  The outstanding balance at the time of payment was $2.0 million.  Additionally, the Company wrote off  unamortized deferred financing costs of approximately $117,000.

8



4.  Series B-1 Preferred Stock

On June 4, 2004, the Company sold 10,000 shares of its Series B-1 Preferred Stock to Fletcher International, Ltd. (Fletcher) for proceeds of $10,000,000. These shares are convertible into common stock at any time. Prior to conversion, each share accrues dividends at an annual rate of the greater of 5% and the 90-day London Interbank Offered Rate (LIBOR) plus 1.5%, subject to adjustment. Dividends are payable, at the Companys option, in cash or registered shares of common stock. At the time of issuance of the Series B-1 Preferred Stock to Fletcher, each share of Series B-1 Preferred Stock was convertible into a number of shares of common stock equal to: (1) the stated value of one share of Series B-1 Preferred Stock plus accrued and unpaid dividends, divided by (2) the conversion price of $11.00, subject to adjustment. In accordance with the terms of the agreement with Fletcher, the
conversion price was decreased to $9.9275 per share because effectiveness of the registration statement relating to the Fletcher shares was delayed until December 28, 2004.

Fletcher may redeem its shares of the Series B-1 Preferred Stock, in lieu of converting such shares, at any time on or after November 28, 2005, for shares of common stock unless the Company satisfies the conditions for cash redemption. If Fletcher elects to redeem its shares and the Company does not elect to make such redemption in cash, then each share of Series B-1 Preferred Stock will be redeemed for a number of shares of common stock equal to: (1) the stated value of $1,000 per share of Series B-1 Preferred Stock plus accrued and unpaid dividends, divided by (2) 102.5% of the prevailing price of common stock at the time of delivery of a redemption notice (based on an average daily trading price formula). If Fletcher elects to redeem its shares and the Company elects to make such redemption in cash, then Fletcher will receive funds equal to the product of: (1) the number of shares of common stock that
would have been issuable if Fletcher redeemed its shares of Series B-1 Preferred Stock for shares of common stock; and (2) the closing price of the common stock on the Nasdaq National Market on the date notice of redemption was delivered. As of June 4, 2014 the Company may redeem any shares of Series B-1 Preferred Stock then outstanding. If the Company elects to redeem such outstanding shares, Fletcher will receive funds equal to the product of: (1) the number of shares of Series B-1 Preferred Stock so redeemed, and (2) the stated value of $1,000 per share of Series B-1 Preferred Stock, plus accrued and unpaid dividends.

In addition, the Company granted Fletcher certain rights entitling Fletcher to purchase up to 20,000 shares of additional preferred stock, at a price of $1,000 per share, for an aggregate additional consideration of $20,000,000. The agreement with Fletcher provides that any shares of additional preferred stock will have the same conversion ratio as the Series B-1 Preferred Stock, except that the conversion price will be the greater of (1) $11.00, or (2) 120% of the prevailing price of common stock at the time of exercise of the rights (based on an average daily trading price formula), subject to adjustment upon the occurrence of certain events. Due to the delay in the effectiveness of the registration statement relating to the Series B-1 Preferred Stock, the conversion price for any such additional series of preferred stock was reduced to the greater of (1) $9.9275, or (2) 108.3% of the prevailing
price of common stock at the time of exercise of the rights. These rights may be exercised by Fletcher on one or more occasions commencing July 1, 2005, and for the 24-month period thereafter, which period may be extended under certain circumstances. The agreement with Fletcher also provides that shares of additional preferred stock will also be redeemable upon terms substantially similar to those of the Series B-1 Preferred Stock.

9



The voting rights of the Series B-1 Preferred stockholders are limited to voting with regard to: (1) any changes to the rights, preferences or privileges of the Series B-1 Preferred stockholders, (2) authorizing, creating or issuing any senior securities or securities that rank pari passu with the Series B-1 Preferred Stock, or any securities issued by a subsidiary of the Company, (3) changing the number of authorized shares of preferred stock, and (4) amending any provision of any security of the Company so as to make such security redeemable by the Company.

For the six months ended  June 30, 2005, dividends in the amount of $251,389 were paid to the Series B-1 Preferred stockholders.  On June 30, 2004, dividends in the amount of $37,000 were paid to the Series B-1 Preferred Stockholders.

5.  Segment Information

The Companys operations are aggregated into three reportable segments.  The operating segments reported below are the segments of the Company for which separate financial information is available and for which operating income is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.

The following segment results include the allocation of certain information technology costs, accounting services, executive management costs, legal department costs, office facilities expenses, human resources expenses and other shared services, which are allocated based on consumption. Corporate consists of unallocated administrative support functions. The majority of the Companys revenue is earned by the Test Preparation Services division, which sells a range of services including test preparation, tutoring and academic counseling. Test Preparation Services derives its revenue from Company operated locations and from royalties from and product sales to independently-owned franchises. The K-12 Services division earns fees from assessment, remediation and professional development services it renders to K-12 schools and from its content development work.  The Admissions Services division earns
revenue from subscription, transaction and marketing fees from higher education institutions and from selling advertising and sponsorships. Additionally, each division earns royalties and other fees from sales of its books published by Random House.

The segment results include EBITDA for the periods indicated. As used in this report, EBITDA means earnings before interest, income taxes, depreciation and amortization and equity in the income (loss) of affiliates. The Company believes that EBITDA, a non-GAAP financial measure, represents a useful measure for evaluating its financial performance because it reflects earnings trends without the impact of certain non-cash and non-operations-related charges or income. The Companys management uses EBITDA to measure the operating profits or losses of the business. Analysts, investors and rating agencies frequently use EBITDA in the evaluation of companies, but the Companys presentation of EBITDA is not necessarily comparable to other similarly titled measures of other companies because of potential inconsistencies in the method of calculation. EBITDA is not intended as an alternative to net income
(loss) as an indicator of the Companys operating performance, nor as an alternative to any other measure of performance calculated in conformity with GAAP.

10



|                                                               |  | Three Months Ended June 30, 2005 |       
|-------------------------------------------------------------- |  | -------------------------------- | ------
|                                                               |  |                                  |       
|                                                               |  | (In thousands)                   |       
|                                                               |  | Test   Preparation   Services    |       
|                                                               |  |                                  |       
|Revenue                                                        |  | $                                | 20,630
|                                                               |  |                                  |       
|Operating expenses   (including depreciation and amortization) |  | $                                | 11,545
|                                                               |  |                                  |       
|Operating (loss) income                                        |  | $                                | 2,633 
|Depreciation &   amortization                                  |  |                                  | 443   
|Equity in the loss of   affiliates                             |  |                                  |      
|                                                               |  |                                  |       
|EBITDA                                                         |  | $                                | 3,076 
|                                                               |  |                                  |       

|       |  | As of June 30, 2005 |       
|------ |  | ------------------- | ------
|       |  |                     |       
|       |  | (In thousands)      |       
|Assets |  | $                   | 37,626
|       |  |                     |       

|                                                               |  | Three Months Ended June 30, 2004 |       
|-------------------------------------------------------------- |  | -------------------------------- | ------
|                                                               |  |                                  |       
|                                                               |  | (In thousands)                   |       
|                                                               |  | Test   Preparation   Services    |       
|                                                               |  |                                  |       
|Revenue                                                        |  | $                                | 18,163
|                                                               |  |                                  |       
|Operating expenses   (including depreciation and amortization) |  | $                                | 10,575
|                                                               |  |                                  |       
|Operating (loss) income                                        |  | $                                | 2,275 
|Depreciation &   amortization                                  |  |                                  | 391   
|Equity in the loss of   affiliates                             |  |                                  |      
|                                                               |  |                                  |       
|EBITDA                                                         |  | $                                | 2,666 
|                                                               |  |                                  |       

|       |  | As of December 31, 2004 |       
|------ |  | ----------------------- | ------
|       |  |                         |       
|       |  | (In thousands)          |       
|Assets |  | $                       | 36,424
|       |  |                         |       

11



|                                                               |  | Six Months Ended June 30, 2005 |       
|-------------------------------------------------------------- |  | ------------------------------ | ------
|                                                               |  |                                |       
|                                                               |  | (In thousands)                 |       
|                                                               |  | Test   Preparation   Services  |       
|                                                               |  |                                |       
|Revenue                                                        |  | $                              | 43,515
|                                                               |  |                                |       
|Operating expenses   (including depreciation and amortization) |  | $                              | 22,917
|                                                               |  |                                |       
|Operating  (loss) income                                       |  | $                              | 7,109 
|Depreciation &   amortization                                  |  |                                | 911   
|Equity in the loss of   affiliate                              |  |                                |      
|                                                               |  |                                |       
|EBITDA                                                         |  | $                              | 8,020 
|                                                               |  |                                |       

|                                                               |  | Six Months Ended June 30, 2004 |       
|-------------------------------------------------------------- |  | ------------------------------ | ------
|                                                               |  |                                |       
|                                                               |  | (In thousands)                 |       
|                                                               |  | Test   Preparation   Services  |       
|                                                               |  |                                |       
|Revenue                                                        |  | $                              | 36,993
|                                                               |  |                                |       
|Operating expenses   (including depreciation and amortization) |  | $                              | 21,932
|                                                               |  |                                |       
|Operating  (loss) income                                       |  | $                              | 3,928 
|Depreciation &   amortization                                  |  |                                | 769   
|Equity in the loss of   affiliates                             |  |                                |      
|                                                               |  |                                |       
|EBITDA                                                         |  | $                              | 4,697 
|                                                               |  |                                |       

12



Reconciliation of operating  (loss) income to net (loss) income (in thousands):

|                                               |  | Three Months Ended June 30, |      | Six Months Ended June 30, |  
|---------------------------------------------- |  | --------------------------- | ---- | ------------------------- | -
|                                               |  |                             |      |                           |  
|                                               |  | 2005                        |      | 2004                      |  
|                                               |  |                             |      |                           |  
|Total (loss) income from   reportable segments |  | $                           | (378 | )                         | $
|Interest   expense                             |  |                             | (82  | )                         |  
|Other   income                                 |  |                             | 84   |                           |  
|Equity   in loss of affiliate                  |  |                             | (94  | )                         |  
|(Provision)   benefit for income taxes         |  |                             |     |                           |  
|                                               |  |                             |      |                           |  
|Net   (loss) income                            |  | $                           | (470 | )                         | $
|                                               |  |                             |      |                           |  

6. Loss Per Share

Basic and diluted net loss per share information for all periods is presented under the requirements of SFAS No. 128, Earnings per Share. Basic net loss per share is computed by dividing net loss attributed to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net loss per share is determined in the same manner as basic net loss per share except that the number of shares is increased assuming exercise of dilutive stock options, warrants and convertible securities and dividends related to convertible securities are added back to net loss attributed to common stockholders.  The calculation of diluted net loss per share excludes potential common shares if the effect is antidilutive.  During the periods presented in which the Company reported a net loss, shares of convertible securities and stock options that would be dilutive were
excluded because to include them would have been antidilutive.

The following table sets forth the denominators used in computing basic and diluted earnings (loss) per common share (in thousands) for the periods indicated:

|                                                                             |  | Three Months Ended June 30, |        | Six Months Ended June 30, | 
|---------------------------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | 
|                                                                             |  |                             |        |                           | 
|                                                                             |  | 2005                        |        | 2004                      | 
|                                                                             |  |                             |        |                           | 
|Weighted average common   shares outstanding                                 |  |                             |        |                           | 
|Basic                                                                        |  |                             | 27,570 |                           | 
|Net   effect of convertible preferred stock-based on the if converted method |  |                             |       |                           | 
|Net   effect of diluted stock options - based on the treasury stock method   |  |                             |       |                           | 
|Other                                                                        |  |                             |       |                           | 
|                                                                             |  |                             |        |                           | 
|Diluted                                                                      |  |                             | 27,570 |                           | 
|                                                                             |  |                             |        |                           | 

Excluded from the computation of diluted earnings per common share because of their antidilutive effect were, 1,007,303 shares of Series B-1 Preferred stock, 123,936 stock options and 9,128 of other for the three months ended June 30, 2005; 1,007,303 shares of Series B-1 Preferred stock , 117,962 stock options and 9,128 of other for the six months ended June 30, 2005 and 134,865 of Series B-1 Preferred stock, 378,157 stock options and 9,128 of other for the six months ended June 30, 2004.

13



7. Comprehensive (Loss) Income

The components of comprehensive  (loss) income for the three and six-months ended June 30, 2005 and 2004 are as follows:

|                                                                                                               |  | Three Months Ended June 30, |      | Six Months Ended June 30, |  
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---- | ------------------------- | -
|                                                                                                               |  |                             |      |                           |  
|                                                                                                               |  | 2005                        |      | 2004                      |  
|                                                                                                               |  |                             |      |                           |  
|                                                                                                               |  | (in thousands)              |     
|Net (loss) income   attributable to common stockholders                                                        |  | $                           | (668 | )                         | $
|Foreign currency   translation adjustment                                                                      |  |                             | (16  | )                         |  
|Unrealized gain on   available-for-sale securities, net of tax provision of $0, $0, $0 and $12,   respectively |  |                             |     |                           |  
|                                                                                                               |  |                             |      |                           |  
|Total comprehensive (loss)   income                                                                            |  | $                           | (684 | )                         | $
|                                                                                                               |  |                             |      |                           |  

Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

All statements in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements may be identified by words such as believe, intend, expect, may, could, would, will, should, plan, project, contemplate, anticipate or similar statements.  Because these statements reflect our current views concerning future events, these forward-looking statements are subject to risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to demand for our products and services; our ability to compete effectively and adjust to rapidly changing
market dynamics; the timing of revenue recognition from significant contracts with schools and school districts; market acceptance of our newer products and services; continued federal and state focus on assessment and remediation in K-12 education; and the other factors described under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC.  We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The following information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2004, as well as in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Form 10-Q.

Overview

The Princeton Review provides educational products and services to students, parents, educators and educational institutions.   These products and services include integrated classroom-based and online instruction, professional development for teachers and educators, print and online materials and lessons, and higher education marketing and admissions management.  We operate our businesses through three divisions, which correspond to our business segments.

Our Test Preparation Services division derives the majority of its revenue from classroom-based and Princeton Review Online test preparation courses and tutoring services.  Since 2004 this division has also been providing Supplementary Educational Services (SES), or after school academic instruction under the No Child Left Behind Act of 2001, to students in public school districts.

Our K-12 Services division provides a number of services to K-12 schools and school districts, including assessment, professional development and face-to-face instruction.  As a result of the increased emphasis on accountability and the measurement of student performance in public schools in this country and the centralization of school districts purchasing of assessment, professional development and supplemental educational products and services, this division continues to see growing demand by the public school market for its products.

14



Our Admissions Services division  derives most of its revenue from the sale of web-based admissions and application management products and marketing services to higher education institutions. We are continuing with the process of refocusing this divisions marketing services business model.  We are moving from a model of pricing for various bundles of marketing services, to a model where payment is based upon actual leads we generate.  We believe this model will allow us to better capitalize on the popularity of our web site with college and graduate school-bound students.  To support this change in our marketing services model, we have re-launched our web site with a view to optimizing our ability to match the right prospects with the post-secondary institutions looking to attract them.

In general, the second quarter of 2005 showed solid growth in revenue in the Test Prep division, partially offset by  decreases in revenue in the K-12 and Admissions Services divisions. The increased emphasis on preparing for the new SAT test and the increase in SES revenues, which derive from programs that assist public schools with their students academic performances as measured on state assessment tests, were major forces behind the increased revenue in the Test Prep division during the quarter.  The K-12 Services divisions revenue decrease is due primarily to a decline in content development work, including book manuscripts delivered  to Random House.  Revenue from this divisions core business of delivering assessment, professional development, live courses and intervention products remained at roughly the same level as last year, due to a high level of renewals.
While we continue to see opportunities in the market for this divisions products and services we have experienced some problems with fully staffing our sales team and delays in closing the larger deals due to the lengthy proposal acceptance processes of our target customers. We expect that new contracts signed in the latter part of 2005 will lead to resumed revenue growth for the full year based on our expectations of deals in the current pipeline.  In the Admissions Services division, we continue to experience growth in our marketing services revenue.  We now have over 250 post-secondary school customers for whom we have provided leads.  We have delivered the initial order of scheduled leads for most of these customers and we must now procure additional lead orders from those customers, as well as attract new customers for this service. However, the increases in marketing service revenue were more than offset by revenue decreases in certain application and subscription fees from
customers that did not renew after the 2003-2004 school years.   Notwithstanding the revenue declines in this division from application and subscription fees, we continue to believe that revenue from sales of lead generation and high school counseling services will result in this division posting modest revenue growth overall for full year 2005.

On the expense side, SG&A for the three months ended June 30, 2005 increased by 4% over the same period in 2004, resulting primarily from increases in professional fees related to Sarbanes-Oxley compliance and headcount increases in our K-12 Services division and in corporate.  After excluding the goodwill writedown in 2004, we expect SG&A expenses in 2005 to increase only modestly over the 2004 levels.

Results of Operations

Three Months Ended June 30, 2005 Compared With Three Months Ended June 30, 2004

Revenue

Our total revenue increased from $28.4 million in 2004 to $29.8 million in 2005, representing a 5% increase.

Test
Preparation Services revenue increased from $18.2 million in 2004 to $20.6
million in 2005, representing a 14% increase, comprised primarily of an increase
of approximately $2.3 million in revenue from our company-owned
operations.  The increased revenue from company-owned operations resulted
from an increase of approximately $1.8 million in course and tutoring
revenue, reflecting strong enrollment in SAT courses, and an increase
of approximately $513,000 in SES sales to schools.

K-12 Services revenue decreased from $7.7 million in 2004 to $7.1 million in 2005, representing a 7% decrease. This decrease resulted primarily from a reduction of approximately $733,000 in fees for content sales to our publisher and other institutions.  The revenue from schools for the sale of this divisions core products and services remained at approximately the same level as the comparable period last year.

Admissions Services revenue decreased from $2.6 million in 2004 to $2.0 million in 2005, representing a 21% decrease. This decrease resulted primarily from lower application and technology subscription fees, which decreased by approximately $850,000.  This decrease was partially offset by increases in marketing services revenue of approximately $600,000.

15



Cost of Revenue

Our total cost of revenue increased from $8.9 million in 2004 to $10.7 million in 2005, representing a 21% increase.

Test Preparation Services cost of revenue increased from $5.3 million in 2004 to $6.5 million in 2005 representing a 21% increase, primarily as a direct result and in proportion to the enrollment increases, which caused variable costs such as teacher pay, site rent and course materials to increase.  Gross margins were 68.7% and 70.7% in 2005 and 2004, respectively.

K-12 Services cost of revenue increased from $3.0 million in 2004 to $3.2 million in 2005, representing a 6% increase. This increase is primarily attributable to an increase in costs incurred to service contracts with school-based customers and the mix of products sold, which negatively impacted gross margins in this division.  Gross margins decreased from 60% in 2004 to 54% in 2005.

Admissions Services cost of revenue increased from $557,000 in 2004 to $1.1 million in 2005, representing a 94% increase, primarily due to higher costs to service our counseling customers.  During the second quarter of  2004 our large counseling contract with Colorado was just beginning and did not generate significant costs.  This contract has relatively low margins and with the full complement of staffing on this contract in the second quarter of 2005, the overall gross margins in this division were negatively affected.  Higher customer support costs and customer credits issued, which lowered revenues, also negatively affected the gross margins in this division which fell from 78% to 47%.

Operating Expenses

Selling, general and administrative expenses increased from $18.6 million in 2004 to $19.5 million in 2005, representing a 5% increase.  This increase resulted from the following:

| |  | an increase   of approximately $1.2 million in primarily accounting, legal and   Sarbanes-Oxley related professional fees; and                    
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase   of approximately $557,000 in salaries and payroll taxes in our company-owned   sites, K-12 customer support and corporate functions.

These increases were partially offset by decreases of approximately $599,000 in advertising and marketing expenses and approximately $394,000 in bad debt expense.

Income Taxes

The estimated effective tax rate used in 2005 was approximately 40%, as compared to 42% during 2004.  However, during 2005 we continued to record a valuation allowance against the increase in our deferred tax asset.  If we achieve profitability for the 2005 fiscal year, any tax provision recorded as a result of these pre-tax profits will be offset by a reversal of the tax valuation allowance previously recorded, which reversal would be for the same amount as the provision.  This will result in zero net tax expense for all periods until the valuation allowance is fully reversed.

Six Months Ended June 30, 2005 Compared With Six Months Ended June 30, 2004

Revenue

Our total revenue increased from $56.4 million in 2004 to $63.4 million in 2005, representing a 12% increase.

Test Preparation Services revenue increased from $37.0 million in 2004 to $43.5 million in 2005, representing an 18% increase, comprised primarily of an increase of approximately $6.0 million in revenue from our company-owned operations. The increased revenue from company-owned operations resulted from an increase of approximately $5.1 million in course and tutoring revenue driven primarily by strong SAT enrollment, and an increase of approximately $1.2 million in SES sales to schools.

K-12 Services revenue increased from $14.0 million in 2004 to $15.0 million in 2005 representing an 8% increase.  This increase resulted primarily from an increase of approximately $1.5 million in revenue from schools for printed test materials, professional development, live courses and Homeroom subscriptions.  This increase was partially offset by a decrease in revenue from content sales to our publisher and other institutions.

16



Admissions Services revenue decreased from $5.4 million in 2004 to $4.8 million in 2005, representing an 11% decrease. This decrease resulted primarily from lower application and technology subscription fees which decreased by approximately $1.4 million.  This decrease was partially offset by increases in marketing services revenue of approximately $844,000.

Cost of Revenue

Our total cost of revenue increased from $19.0 million in 2004 to $22.9 million in 2005, representing a 21% increase.

Test Preparation Services cost of revenue increased from $11.1 million in 2004 to $13.5 million in 2005, representing a 21% increase, primarily as a result of increasing the number of courses and tutoring sessions delivered year to date.  Gross margins were approximately the same in both periods.

K-12 Services cost of revenue increased from $6.7 million in 2004 to $7.4 million in 2005, representing an 11% increase.  This increase is primarily attributable to an increase in customer support costs, which lowered gross margins from approximately 52% in the first half of 2004 to 50% in the current year.

Admissions Services cost of revenue increased from $1.2 million in 2004 to $1.9 million in 2005, representing a 68% increase, primarily due to greater customer support costs and costs associated with our large counseling contract with Colorado.   Higher customer support costs and customer credits issued, which lowered revenues, also negatively affected the gross margins in this division which fell from 79% to 60%.

Operating Expenses

Selling, general and administrative expenses increased from $37.6 million in 2004 to $40.7 million in 2005, representing an 8% increase.  This increase resulted from the following:

| |                                                                             | an increase   of approximately $2.6 million in salaries and payroll taxes at our company   owned sites, K-12 customer support and corporate; and
| | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                             | an increase   of approximately $2.4 million in primarily accounting, legal and   Sarbanes-Oxley related professional fees.                      
| |                                                                              |                                                                                                                                                 
| | These   increases were partially offset by decreases in the following areas:
| |                                                                              |                                                                                                                                                 
| |                                                                             | a decrease   of approximately $943,000 in advertising and marketing expenses;                                                                   
| |                                                                             | a decrease   of approximately $407,000 in web site technology and development expenses;   and                                                   
| |                                                                             | a decrease   of approximately $240,000 in bad debt expense.                                                                                     

We expect that we will incur between $1.0 and $1.5 million in professional fees related to Sarbanes-Oxley compliance in the second half of 2005.

Income Taxes

The estimated effective tax rate used in 2005 was approximately 40%, as compared to 42% during the first half of 2004.  However, during the first half of 2005 we continued to record a valuation allowance against the increase in our deferred tax asset.  If we achieve profitability for the 2005 fiscal year, any tax provision recorded as a result of these pre-tax profits will be offset by a reversal of the tax valuation allowance previously recorded, which reversal would be for the same amount as the provision.  This will result in zero net tax expense for all periods until the valuation allowance is fully reversed.

Liquidity and Capital Resources

Our current primary sources of liquidity are cash and cash equivalents on hand and collections from customers.  At June 30, 2005, we had approximately $11.5 million of cash and cash equivalents.  Our Test Preparation Services division has historically generated, and

17



continues to generate, the largest portion of our cash from its retail classroom and tutoring courses.  These customers usually pay us in advance or contemporaneously with the services we provide, thereby supporting our short-term liquidity needs.  Increasingly, however, across all of our divisions, we are generating a greater percentage of our cash from contracts with institutions such as K-12 schools and school districts and post-secondary institutions, which pay us in arrears.  Typical payment terms for these institutional customers, once invoiced, range from 60 to 90 days.  Additionally, the long contract approval cycles of some of our contracts with large institutions or school districts can contribute to the level of variability in the timing of our cash receipts, as these contracts sometimes require performance to begin significantly in advance of collection of payments.

During 2004
and the first quarter of 2005, we experienced an  increase in the aging of
receivables from many of these customers, partially as a result of decreased
focus on collections due to enormous strains on accounting resources required by
the internal controls assessment mandated by Section 404 of
Sarbanes-Oxley. We have hired additional employees to collect
these outstanding amounts and have experienced an improvement in our days
sales outstanding which decreased to 62 days at June 30, 2005, from 78
days at March 31, 2005.

Cash provided by operating activities is net loss adjusted for certain non-cash items and changes in assets and liabilities.  During the first half of 2005, cash provided by operating activities was $1.5 million, compared to $803,000 used in the first half of 2004.   In 2005, the majority of the cash provided by operating activities was due primarily to lower working capital requirements as receivables were collected.  This was partially offset by decreases in accounts payable and recognition of previously deferred income.

Investing cash flows consist primarily of capital expenditures.  We used $6.0 million in net cash for investing activities during the first half of 2005, compared to $4.4 million during the first half of 2004.  The increase in capital expenditures is due primarily to software purchased, increased development projects and new office construction.

Financing cash flows consist primarily of transactions related to our debt structure.  During the first half of 2005 we repaid approximately $2.0 million of debt we borrowed under a bank credit facility as well as other less significant payments made on capital leases and notes payable.

We anticipate that our cash balances, together with cash generated from operations, will be sufficient to meet our normal operating requirements for at least the next 12 months.  Our future capital requirements will depend on a number of factors, including market acceptance of our products and services and the resources we devote to developing, marketing, selling and supporting these products and services. We expect to continue to devote substantial capital resources to product development and support and advertising, marketing and promotional activities. We may also seek another credit facility to buffer our working capital requirements.

Impact of Inflation

Inflation has not had a significant impact on our historical operations.

Seasonality in Results of Operations

We
     experience, and we expect to continue to experience, seasonal fluctuations
     in our revenue because the markets in which we operate are subject to
     seasonal fluctuations based on the scheduled dates for standardized
     admissions tests and the typical school year. These fluctuations could
     result in volatility or adversely affect our stock price.  We
     typically generate the largest portion of our test preparation revenue in
     the third quarter.  However, as SES revenue grows, we expect this
     revenue will be concentrated in the fourth and first quarters, or to more
     closely reflect the afterschool programs greatest activity during the
     school year.  The electronic application revenue recorded in our
     Admissions Services division is highest in the first and fourth quarters,
     corresponding with the busiest times of the year for submission of
     applications to academic institutions. Our K-12 Services division may also
     experience seasonal fluctuations in revenue, which is dependent on the
     school year, and it is expected that the revenue from new school sales
     during the year will be recognized primarily in the fourth quarter and the
     first quarter of the following year.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Included in our cash and cash equivalents are short-term money market funds.  The fair value of these money market funds would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due primarily to the short-term nature of the portfolio.  Our Series B-1 Preferred Stock requires the payment of quarterly dividends at the greater of 5% or 1.5% above 90-day

18



LIBOR.  During the three months ended June 30, 2005, we paid dividends on the Series B-1 Preferred Stock in an aggregate amount of $126,389 at the rate of 5%.  A 100 basis point increase in the dividend rate would have resulted in a $25,000 increase in dividends paid during this period.  We do not currently hold or issue derivative financial instruments

Revenue from our international operations and royalty payments from our international franchisees constitute an insignificant percentage of our revenue.  Accordingly, our exposure to exchange rate fluctuations is minimal.

Item 4.  Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act, (Disclosure Controls) as of the end of the period covered by this Quarterly Report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Scope of the Controls Evaluation

The evaluation of our Disclosure Controls included a review of the controls objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the controls evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and in our Annual Reports on Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by other personnel in our accounting, finance and legal functions. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls and to modify them on an ongoing basis as necessary.

A control system can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusions

As described in detail in Item 9A of the companys Form 10-K/A, dated May 2, 2005 (Form 10-K/A), the companys management assessed the effectiveness of the companys internal control over financial reporting as of December 31, 2004.  Managements assessment identified three material weaknesses in internal control over financial reporting as of that date.  These material weaknesses were identified in the areas of capitalized software development costs, financial statement close process and revenue recognition.  During the period covered by this Quarterly Report, we continued to implement the extensive remediation described in more detail below. While our management believes that these material weaknesses are in the process of being remediated, we have not conducted enough testing to be certain of the results of these remediation efforts.  Accordingly, our
CEO and CFO concluded, after the evaluation described above, that our Disclosure Controls were not effective, as of the end of the period covered by this Quarterly Report, in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.  Notwithstanding this conclusion, the companys preparation of its financial statements for the period covered by this report, and its evaluation of Disclosure Controls as of the end of such period, were conducted with particular attention to the material weaknesses identified by management in the Form 10-K/A and the remediation activities discussed below, and management continued to retain third party consultants and hire additional accounting personnel during the period to provide certain compensating controls and other assistance in areas where material weaknesses were identified. 
Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects our financial condition, results of operations and cash flows as of and for the periods presented.

19



Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the following remediation:

| |  | We have hired and continue   to hire more qualified and experienced accounting personnel to perform the   month-end review and closing processes as well as provide additional oversight   and supervision within the accounting department.                                                                                                                                                            
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | We are in the process of   implementing a tier one accounting and financial reporting software system to   further automate and integrate and thereby improve the companys financial   reporting processes and systems by removing unnecessary manual interfaces and   to facilitate the revenue recognition of multiple element contracts.    This system is expected to be fully implemented in 2006.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | We are in the process of   establishing written policies and procedures to ensure that account   reconciliation and amounts recorded, as well as the review of these areas,   are substantiated by detailed and contemporaneous documentary support and   that reconciling items are investigated, resolved and recorded in a timely   manner.                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | We have initiated programs   providing ongoing training and professional education and development plans   for the accounting department and improving internal communications   procedures throughout the company.                                                                                                                                                                                     

In addition to the foregoing remediation efforts, we continue to work with a consulting firm to assist us with the continuing improvement of our internal control processes.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

On September 10, 2003, CollegeNet, Inc. filed suit in Federal District Court in Oregon, alleging that The Princeton Review infringed a patent owned by CollegeNet related to the processing of on-line applications.  CollegeNet never served The Princeton Review and no discovery was ever conducted.  However, based on adverse rulings in other lawsuits concerning the same patent, CollegeNet dismissed the 2003 case without prejudice on January 9, 2004 against The Princeton Review.  Thereafter, on August 2, 2005, the Federal Circuit Court of Appeals issued an opinion favorable to CollegeNet from its appeal from the adverse rulings.  Then on August 3, 2005, CollegeNet filed suit again against The Princeton Review alleging an infringement of the same CollegeNet patent related to processing on-line applications.  At this time The Princeton Review has not been served and accordingly it has no answer




 date and no discovery has been conducted. CollegeNet
seeks injunctive relief and unspecified monetary damages. Because this potential proceeding is at a very preliminary stage, we are unable to predict its outcome with any degree of certainty.  However, The Princeton Review believes that it has meritorious defenses to CollegeNets claims of infringement and intends to vigorously defend.

In addition to the foregoing, from time to time, we are involved in legal proceedings incidental to the conduct of our business, none of which is likely to have a material adverse effect on us.

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Not applicable.

Item 3.  Defaults Upon Senior Securities

Not applicable.

20



Item 4.  Submission of Matters to a Vote of Security Holders

(a)    We held our Annual Meeting of Stockholders on June 9, 2005.

(b)    Proxies for the meeting were solicited pursuant to Regulation 14 under the Exchange Act; there was no solicitation in opposition to the Board Nominating Committees nominees listed in the Proxy Statement, and all such nominees were elected.

Directors elected to the 2008 Class were Robert E. Evanson, John S. Katzman and John C. Reid.

Election of Directors:

|                    | For        |  | Withheld 
|------------------- | ---------- |  | ---------
|                    |            |  |          
|Robert E.   Evanson | 26,436,735 |  | 66,420   
|John S.   Katzman   | 25,318,166 |  | 1,184,989
|John C. Reid        | 26,174,814 |  | 328,341  

Other directors whose terms continue after the meeting were Richard Katzman, Richard Sarnoff, Sheree Speakman and Howard Tullman.

(c)    The appointment of Ernst & Young LLP, independent registered public accounting firm, to audit our consolidated financial statements for the year 2005 was ratified by the following vote:

|For     |  |  | 26,438,010 | 
|------- |  |  | ---------- | 
|Against |  |  | 64,085     | 
|Abstain |  |  | 1,060      | 

Item 5.  Other Information

On June 6, 2005, the Nominating Committee of our Board of Directors was reconstituted to consist solely of independent directors.  Effective as of that date, our Nominating Committee was comprised of John C. Reid (Chair), Sheree T. Speakman and Howard A. Tullman.  As of July 28, 2005, the Nominating Committee was again reconstituted and currently consists of Sheree T. Speakman (Chair), Robert E. Evanson and John C. Reid.

Additionally, on July 28, 2005, the Audit and Compensation Committees of our Board of Directors were reconstituted as follows:

Audit Committee: Robert E. Evanson (Chair), Sheree T. Speakman and Howard A. Tullman. 
 Compensation Committee: Howard A. Tullman (Chair), Robert E. Evanson and John C. Reid

Each of the directors named in this Item 5 is independent in accordance with the standards established by Nasdaq.

Item 6.  Exhibits

| | Exhibit   Number |  | Description                                                                                                                
| | ---------------- |  | ---------------------------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                                            
| | 31.1             |  | Certification   Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the   Sarbanes-Oxley Act of 2002.        
| |                  |  |                                                                                                                            
| | 31.2             |  | Certification   Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the   Sarbanes-Oxley Act of 2002.        
| |                  |  |                                                                                                                            
| | 32.1             |  | Certification   Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|                  | THE PRINCETON   REVIEW, INC.
|----------------- | ----------------------------
|                  |                             
|                  | By:                         
|                  |                             
|                  |                             
|                  |                             
|                  |                             
|                  |                             
|                  |                             
|August    9, 2005 |                             

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